1 Kuznets''s Monster For most of human history the workings of what we casually refer to as "the economy" were pretty much a black box. Indeed, for millennia the concept of an economy hardly existed at all. There were at least two reasons for this. First, before the eighteenth-century Industrial Revolution, there was really no such thing as economic growth. That made the economy an awful lot duller. The output of agricultural societies was pretty much a function of the weather. If rains were good, the harvest was good. If not, it wasn''t.
Nor, in this pre-industrial world, were there huge productivity gaps between one region and another. Most people were just scraping by. Thus the size of a region''s economy was largely determined by the size of its population. In ad 1000 China and India accounted for just over half of global economic output, a proportion that remained unchanged for 600 years (and may be heading that way again). Second, in an era of monarchs--especially those lucky enough to have been ordained by God--what was going on in the broader economy was of no great concern. For an absolute monarch there was no distinction between his own wealth and that of his realm. Given the lack of distinction between the wealth of the monarch and the wealth of the nation, there was little room for anything we might call an economy. Apart from keeping the court in its accustomed luxury, the only thing required of a national economy was to finance war.
A nation grew only if it conquered new dominions. If the king could muster armies to grab new territory, the national weal would be increased. But how could you tell whether your nation could bear the cost? Most early attempts to catalogue the size of an economy were driven by the need to work out the monarch''s capacity to wage war. So it was in France. In 1781 Jacques Necker, the Swiss finance minister of Louis XVI, presented his famous compte rendu au roi, his "report to the king," the first attempt to take serious stock of France''s finances. Necker, formerly a wildly successful banker--are the alarm bells going off yet?--showed that France''s finances were in rude health. Revenues were said to exceed expenditure by the enormous sum of 10 million livres. The main purpose of the report was to demonstrate that France could easily afford its involvement in the American Revolutionary War, in which, as was customary, it found itself on the opposite side to Britain.
Necker, who had made his own fortune through speculation, wanted to prove that France''s finances were so solid it could easily borrow money to finance its war effort. What the compte rendu cleverly omitted, however, was that France had already borrowed heavily under Necker''s own direction. One of the earliest attempts to present a set of national accounts was also a piece of fiction. Necker''s stab at national accounting was not the first. That distinction is usually given to William Petty, whose publication of the Down Survey in 1652 is considered by many to be the first systematic effort to survey a country''s economy--in this case, that of Ireland. With the help of simple instruments and a thousand unemployed soldiers, Petty undertook the comprehensive mapping of land in thirty counties covering 5 million acres. The principal motivation was to carve up Catholic land conquered by Oliver Cromwell during the Civil War and to use it to pay back those who had financed the war as well as the arrears of soldiers'' wages. In addition to mapping the land, Petty conducted a fairly rigorous survey of assets, including ships, houses, and personal estates.
From this he worked out flows of income that would be generated, a crucial distinction from earlier efforts to catalogue stocks of wealth such as the Domesday Book of 1086. Later, after the restoration of King Charles II, Petty did the same in England and Wales. This time the objective was to improve the monarch''s capacity to tax his subjects. Petty recommended keeping records on domestic consumption, production, trade, and population growth and started to develop methods for assessing the value of labor as well as land. If early attempts to survey the economy had common themes of war, taxation, and subservience to the monarch''s needs, there were other schools of thought pulling in a different direction. In France in the eighteenth century the so-called physiocrats emphasized that the wealth of a nation was rooted in farm production and productive work. Subtly different from Petty, in the physiocrats'' interpretation the "productive class" consisted of mainly agricultural laborers, while the so-called "sterile" class included "artisans, professionals, merchants and, lo and behold, the King himself." Viewed from this perspective, the invention of the economy--as something distinct from the monarch--was a profoundly democratic act.
Adam Smith, in his An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776, also divided labor into productive and unproductive categories. A man, he wrote, "grows rich by employing a multitude of manufacturers: He grows poor by maintaining a multitude of menial servants." It wasn''t a very flattering view of the leisured classes. Along with hosts of servants performing useless tasks for do-nothing aristocrats, Smith put the monarch, as well as the army and the navy, into the category of unproductive labor. What unites these early attempts to catalogue national wealth is an effort to draw what economists today call the production boundary--between activities that should be counted and those that should not. In short, they were trying to answer a question that is still relevant today: precisely what is an economy? In the great economic ledger should the king appear on the plus side, the embodiment in flesh and blood of the national patrimony? Or, as the physiocrats and Adam Smith implied, should he be on the negative side of the ledger, an unproductive spender of the nation''s resources? The same question of what should be included and what should be excluded has rumbled on ever since. Should we include government spending? How about providers of services, whose contributions to society--healthy minds (psychoanalysts), humor (clowns), education (teachers)--may be harder to count than horseshoes or bushels of wheat? In the twentieth century communist countries largely ignored services altogether. Even today we struggle to measure their economic contribution.
Modern national accounts of the type used by virtually every country in the world today only really began to take shape in the 1930s. Simon Kuznets is usually credited with the invention of GDP, the quintessence of the national accounting system. But Kuznets, rather like Victor Frankenstein, soon saw his creation take on a life--and a direction--of its own. The man who is said to have invented our way of measuring growth was born in 1901 into a merchant family in the town of Pinsk in what was then part of the Russian empire. Pinsk had a large Jewish population and Kuznets''s parents were Belarusian Jews. As a child he lived under the rule of the tsar, and as an adolescent sympathized with the Mensheviks, whose hopes of reforming tsarist Russia were swept aside by the Bolshevik revolution of October 1917. Kuznets then studied at Kharkiv University in Ukraine, where he attended the Institute of Commerce and studied economics, history, statistics, and mathematics. He was a young man of great social conscience and ideals.
His tutors at Kharkiv stressed the importance of basing opinions on empirical data, a lesson that stayed with him for life. There was also an emphasis on placing economic theory in a wider historical and social context. Kuznets was a brilliant student and by his early twenties had published his first paper on the wages of factory workers in Kharkiv. His studies at the university were interrupted by the Russian civil war, and in 1922 the family fled, via Turkey, to the US. It was here that the Belarusian émigré was to make a profound and lasting impact on global economics. Kuznets continued his education at Columbia University, graduating in 1923 and receiving his PhD in 1926. The following year he joined the National Bureau of Economic Research, a think tank founded in 1920. Kuznets would become a distinguished academic economist with something any self-respecting economist aspires to--a curve named after him.
(Oh, and he also won a Nobel Prize in economics in 1971.) His most lasting achievement, however, came in the intersection between economics and the real world. Kuznets loved data. He worked closely with the first director of research at the National Bureau of Economic Research, Wesley Mitchell, who was also chairman of President Herbert Hoover''s Committee on Social Trends. That work took Kuznets into the heart of government policy. Hoover''s election campaign had promised Americans "a chicken in every pot and a car in every garage." What they got instead was the Wall Street Crash and the Great Depression. Hoover''s response to the terrible depression that followed, which at its trough saw at least one in every four Americans without work, was slow and inadequate.
Essentially, he thought the economy would heal itself. Prosperity, he assured Americans, was just around the corner. Hoover may not have been entirely to blame. There was no systematic methodology for drawing up an accurate picture of a national economy. A publication in 2000 by the US Department of Commerce, which praised GDP as "one of the great inventions of the 20th century," quotes an economist as saying, "One reads with dismay of Presidents Hoover and then Roosevelt designing policies to combat the Great Depression of the 1930s on the basis of such sketchy data.